In a decision issued on February 28, 2014 but published only recently, the Superior Court of Delaware addressed an issue of first impression and found that under New York law, horizontal exhaustion does not apply to excess insurance policies.  Typically implicated when a policyholder’s losses span multiple policy periods, horizontal exhaustion traditionally requires that all underlying policies in the same layer must exhaust before any policy in the next layer of insurance coverage is triggered.

The parties’ insurance coverage dispute in Viking Pump, Inc. and Warren Pumps, LLC v. Century Indemnity Company, No. 10C-06-141 FSS CCLD (Del. Sup. Feb. 28, 2014) arose from thousands of asbestos claims that were asserted against the insureds, two manufacturers of products allegedly containing asbestos.  Applicable to the asbestos claims were comprehensive general liability insurance towers covering the insureds’ parent company spanning a fourteen year period.  Each insurance tower consisted of primary and umbrella insurance followed by layers of excess insurance.

Following a jury trial that resulted in a verdict in the insureds’ favor, the court ruled that horizontal exhaustion applied, but did not specify whether it applied to every layer in the insurance towers, or only to the primary and umbrella layers.  Certain excess insurers then filed a Rule 59(e) motion to clarify the court’s holding, taking the position that horizontal exhaustion applied to all layers in the tower.  The excess insurers argued that all first-layer excess policies must be exhausted before any second-layer excess policy is triggered; all second-layer excess policies must be exhausted before any third-layer policy is triggered, and so forth.

The court surveyed the case law concerning horizontal exhaustion and found that although the horizontal exhaustion rule is well-settled in New York, no New York court had addressed the precise question of whether horizontal exhaustion applies to excess insurance.  The court identified only one other case,Kaiser Aluminum and Chem. Corp. v. Certain Underwriters at Lloyds, London, Cal. Super. Ct. Case No. 312415, Kramer, J. (June 13, 2003), that had squarely addressed the issue.  Relying on the California Superior Court’s rationale in Kaiser, which determined that the policies’ language could not form the basis for requiring horizontal exhaustion, the Viking Pump Court ruled that New York’s high court would hold that horizontal exhaustion governs only primary and umbrella policies, not excess policies.  In reaching this conclusion, the Viking Pump Court also determined that neither New York law nor the language in the policies at issue required horizontal exhaustion of the excess layers.

Under the court’s ruling in Viking Pump, a policyholder would not be required to exhaust all first-layer excess policies, including those issued by insolvent insurers, before reaching the second layer of excess insurance under New York law.  Whether New York courts will agree with the reasoning applied by the Superior Court of Delaware in Viking Pump, however, remains to be seen.

A copy of the decision is available here.